Conclusions for Economic Policy and Empirical Macroeconomics

A central insight of the analyses in this study is that the potential output of an economy is neither theoretically unambiguously defined nor is it empirically identifiable in an uncontroversial manner. Indeed, basic static definitions such as the first definition introduced by Arthur Okun in 1962 (“the amount of output an economy can produce as it approaches full employment and full capacity utilization without raising inflationary pressure”, see section 2.2) suggest a fair degree of conceptual clearness and empirical accessibility. However, the dynamic perspective, in particular, highlights the problems: Potential output on the one hand and employment, capacity and inflationary dynamics on the other hand are mutually interdependent. Furthermore, this interdependency is influenced by changing institutional environments, monetary and fiscal decisions and aggregate demand and supply shocks. Consequently, the potential output of an economy is a variable that . for theoretical reasons . cannot be fully explained nor completely projected into the future as a function of current observed data.